In Narnia, 1 binky can be produced with 2 workers and 1 sippy cup can be produce

Question

In Narnia, 1 binky can be produced with 2 workers and 1 sippy cup can be produced with 0.25 workers. In Bedrock, 1 binky can be produced with 1 worker and 1 sippy cup can be produced with 0.50 workers.

      a. What is the opportunity cost of producing 1 sippy cup in Narnia and in Bedrock?

      b. Which country has the comparative advantage in sippy cups?

      c. Suppose that each country has 100 workers and completely specializes in its comparative advantage. How many units of output of sippy cups and binkys will each country produce?

      d. Before trade, Narnia produces 25 binkys and 200 sippy cups, and Bedrock produces 50 binkys and 100 sippy cups. Show how specialization and free trade can make each country better off than it was before the trade situation.

Please answer EACH part - thanks!

Explanation / Answer

Study Island: A country has comparative advantage if it can produce a good for less cost than any other nation. Absolute advantage and comparative advantage are two basic concepts to international trade. Under absolute advantage, one country can produce more output per unit of productive input than another. With comparative advantage, if one country has an absolute (dis)advantage in every type of output, the other might benefit from specializing in and exporting those products, if any exist. A country has an absolute advantage economically over another, in a particular good, when it can produce that good at a lower cost. Using the same input of resources a country with an absolute advantage will have greater output. Assuming this one good is the only item in the market, beneficial trade is impossible. An absolute advantage is one where trade is not mutually beneficial, as opposed to a comparative advantage where trade is mutually beneficial. A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country. The theory of comparative advantage explains why it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. What matters is not the absolute cost of production but the opportunity cost, which measures how much production of one good, is reduced to produce one more unit of the other good.

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